Global Economics

A 'Gas OPEC'? Mostly a Pipe Dream

Russian President Putin has spoken to Iran and Algeria about an alliance of natural-gas producers, but experts think it wouldn't work

"An interesting idea." That's what Russia's President Vladimir Putin, speaking at an annual press conference for Russian and foreign journalists on Feb. 1, called the possibility of a "gas OPEC"—an international consortium or organization that would co-ordinate gas prices the same way that OPEC regulates world oil prices. "We are already trying to coordinate our actions on the markets of third countries. And we also intend to do it in future," Putin added.

Ominous words for global energy consumers? Putin was quick to emphasize that Russia supports "co-ordination" in the gas market, rather than "the creation of some kind of cartel." And his brief comments on the matter hardly qualify as a serious policy statement. Still, the remarks come at a time when the idea of a "gas OPEC" has been increasingly generating interest—not to mention concern—around the world.

Putin's spoke a couple of days after the idea was raised by Ayatollah Ali Khamenei, religious leader of Iran. During a visit by a Russian delegation on Jan. 29, Khamenei said that "by cooperating, our two countries could create a gas export organization similar to OPEC." The Ayatollah pointed out that between them, Russia and Iran own more than half the world's gas supplies.

Reason to Worry?

The issue also attracted a flurry of interest in mid-January, when Russia Energy Minister Viktor Khristenko made an official visit to Algeria—just the latest example of growing energy co-operation between the two countries. The visit prompted a worried reaction from Andris Piebalgs, the EU energy commissioner .

"They could create a kind of cartel," the EU's top energy honcho warned, adding that "the context of these meetings between Russia and Algeria makes us nervous." Russia supplies around 29% of Europe's gas, while Algeria supplies 10%.

Even NATO has recently weighed in on the matter. In a confidential study revealed last November, the alliance's economic committee warned that Russia may be trying to build an international cartel of major gas producers, with a view to using gas supplies as a form of political leverage.

But how realistic are such fears? In fact, most energy analysts believe that threat of an OPEC-style gas cartel is overblown. They note that the gas market differs from the oil market in ways that make coordination between different producers to regulate prices much harder to achieve.

Nothing in Common

In Europe, and most parts of the world, gas is mainly shipped to regional markets by pipeline under long-term contracts that fix the price for several years at a time. This contrasts with the oil market, where oil is traded in spot markets that allow prices to fluctuate from day to day.

Oil producers, who supply oil by tanker as well as by pipeline, can quickly adjust supplies in response to the market situation. Although liquefied natural gas (LNG) can also be supplied by tanker, the LNG market is still in its infancy.

"The principle factor is that apart from exporting gas, [these countries] don't actually have very much in common with each other. If anything, they compete with other for these contracts," says Jonathan Stern,director of gas research at the Oxford Institute for Energy Studies. He calls a gas OPEC "…an idea that sounds exiting, but really it's a bit of a damp squib."

Analysts also point out that it will be much harder for Russia to play the dominating role of Saudi Arabia, OPEC's "swing producer," in any potential gas cartel. In order to influence prices, Saudi Arabia deliberately maintains excess capacity, voluntarily restricting its output. It's hard to imagine Russia doing the same for gas, because of the large revenues Russia gains from the volumes— not just the price—of the gas it exports.

Lack of Coordination

In a 2004 study of the likelihood of a gas market cartel, economists Ronald Soligo and Amy Myers Jaffe of Rice University, argued: "Russia has a very large population and many developmental and social needs. There will be great pressure to produce at capacity in order to generate as much government revenue as possible." The report concluded that "any gas producer group is unlikely to exercise significant market power in the near term."

Similar conclusions were reached by the Oxford Institute of Energy Studies, in a report published last year (Hadi Hallouche, June, 2006). Existing attempts at co-ordination between gas exporters haven't been promising.

Oxford's Stern notes that the Gas Exporting Countries' Forum (GECF), created in 2001 to represent major gas producers, "…has so far been pretty close to a complete failure, to the extent that it didn't even meet last year." Far from coordinating efforts among gas exporters, Russia has been notably reluctant to get too closely involved in the organization, he says.

So the hopes for a gas cartel aren't exactly great. True, as the LNG market develops and the gas market starts to more closely resemble the oil market, the possibilities for coordination increases. But for the time being, global energy customers probably shouldn't lose too much sleep over fears that the world's gas powers are clubbing together against them.